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looking for spread traders

  #21 (permalink)
Market Wizard
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indiantrader View Post
The wave pattern you see is probably due to relatively higher volumes in the june and december.
The volumes and open interest are very low after 2015 dec.

Your confusing crude and natural gas. While you are correct that crude trades mostly in June's and Dec's that's not the case in Natural Gas.

NG is a seasonal product where we fill storage for 7 months of the year and then take it out in 4 months. While crude trades Dec-Dec spreads mostly the key spreads in NG are Apr-Oct (reflects the summer injection premium), Oct-Jan (represents the summer-winter injection premium) and Mar-Apr (reflects the change of season from withdrawing back to refilling.


indiantrader View Post
The volumes and open interest are very low after 2015 dec.
http://www.cmegroup.com/trading/energy/natural-gas/natural-gas_quotes_volume_voi.html

Try looking at ICE you'll see a very different picture. That's where long dated Natural Gas is traded. While average OI on CME for 2017 is in the 200-300 contracts/mth range on ICE it's 4000-6000 contracts/mth (adjusted for contract size). While CME only has odd lot OI past 2018, ICE has OI greater than 100/month out through 2024.


indiantrader View Post
For speculative purposes, the trader should only use contracts with high open interest and good liquidity, so looking beyond 2015 may serve no purpose for speculative trader.
For eurodollars, you would see good volume and open interest right till 2019-20.

That's rather a sweeping statement. While I agree that it is normally very good advice, and a retail trader would probably be foolish to say take a speculative position on Jan 2018 NG that doesn't mean they should only trade high liquidity contracts.

Sometimes when liquidity is low, opportunities arise that wouldn't arise in more liquid markets. Admittedly this normally involves entering into spreads, which people may be less comfortable, and may involve holding positions for weeks, but none the less there can be some good risk reward trades in less liquid markets.

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  #22 (permalink)
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Article at this site may be interesting:
U.S. Energy Information Administration (EIA)


And if you look at these charts (top two mainly)
Natural Gas Prices: Long Term Forecast to 2020 | Data and Charts - knoema.com

You see that us NG is cheap (I assume though cheap shale gas) so with US starting export of LNG at least the various NG markets will move together meaning usa NG will rise.
meaning it would not be a bad idea to buy a far out NG future (altough even if it moved from 4 to 6 that is only $20,000 in a 2, 3 or 4 years... but it could be interesting, or perhaps better write a (naked) put 4.0 ;-)


@SMCJB
Do you know if for CL there was a simular exceptional high spread as there for NG 2006/2007? and if so, roughly around what period?


Last edited by crito; December 28th, 2013 at 11:59 AM.
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  #23 (permalink)
Market Wizard
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crito View Post
@SMCJB
Do you know if for CL there was a simular exceptional high spread as there for NG 2006/2007? and if so, roughly around what period?

When you say exceptionally high spread similar to NG 2006/2007 I assume you mean what happened to the summer-winter spreads (V-F and H-J mostly). These spreads were specifically caused by Brain Hunter & Amaranth taking enormous positions that were unsustainable over the long run.

There are probably some examples of similar things happening in crude but I can't think of anything close to that egregious. There was MG's hedging debacle back in the 90's where they caused front month spreads to plumet every month for quiet a while. USO rolling positions also distorted the front month spread considerably for a period of time before they modified their roll (2007?).

One thing to remember, Natural Gas is a domestic (US & Canada) market, effected by domestic fundamentals. While it is possible to import from oversea's, in reality the cost makes it nonviable except in very specific situations. This also has a constraining effect on the size of the market. Crude on the other hand is an extremely large international market. While the NYMEX Light Sweet Crude Futures Contract (referred to as WTI since that's the crude most often delivered into the contract) is a land locked crude, US crude oil prices do have to follow international supply and demand, as we still import vast amounts of crude. Hence US prices have to compete with international prices. What this means is that if you have a price aberration in the US markets, it has a ripple effect into the international markets, and the forces in the international markets are so large they will often dampen that ripple, which in turns dampens the price aberration. Not saying it doesn't happen - just that it's a lot larger market and hence aberrations are a lot more difficult to last.

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  #24 (permalink)
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I had a look at that Analysis software for seasonal spread trading | SeasonAlgo.com - SA site that was mentioned.
the demo is interesting although you wouldn't have made any money on the Corn spread this year.
may keep an eye out for next year
(they buy the may contract & sell the december around now, hoping for fear)


thanks SMCJB.
its interesting to see that current oil futures are widening. the spread between the CLH14 & CLZ14 is about $7
any idea why that is? or why CL is in backwardation? too many storage tanks?

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  #25 (permalink)
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@SMCJB

Thanks for detailed explanation about NG. Since you are focusing on energy markets, may be you
could answer some of my queries?

Can you show an example of your NG spread trade?

Have you traded spread between WTI-Brent? The recent last 2 years correlation between the two has been about 61%, would you take that into account ? Do you trade WTI on CME or ICE when spreading with brent? Do you get cross exchange margin credit when trading on CME and ICE?

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  #26 (permalink)
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crito View Post
thanks SMCJB.
its interesting to see that current oil futures are widening. the spread between the CLH14 & CLZ14 is about $7
any idea why that is? or why CL is in backwardation? too many storage tanks?

Sorry cant help you there. I find crude a very difficult market compared to trade compared with NG.


indiantrader View Post
@SMCJB
Have you traded spread between WTI-Brent? The recent last 2 years correlation between the two has been about 61%, would you take that into account ? Do you trade WTI on CME or ICE when spreading with brent? Do you get cross exchange margin credit when trading on CME and ICE?

I do not currently trade Brent-WTI but have done previously.

Brent or Brent Blend crude is a North Sea crude that is loaded by ship in Scotland. In reality the Brent program has dropped off so much in recent years that when people refer to Brent, they actually mean a North-Sea basket of crudes that includes Brent but also crudes like Forties. Brent is the crude that most Euro/Russian/African and many Middle Eastern crudes are benchmarked against. Hence in reality it's a far more important bench mark than WTI. North Sea and West African crudes are the swing barrel and go west (USAC USGC) or East (India, Far East etc) depending on price netbacks.

WTI (well technically Light Sweet Crude) is a US based Crude Oil contract based upon Light Sweet Crude (almost exclusively WTI - hence the name) delivered to Cushing OK. For decades the US was a very large crude importer and had to first import crude and then transport crude from the Gulf Coast up into OK. Hence crude prices on the Gulf Coast ("GC") had to price themselves high enough versus international prices to attract barrels, and crude prices in OK priced themselves at a premium to even the GC. This is why when you look at historical Brent-WTI prices, WTI traded at a $1-$1.50 premium to Brent.

With the large shift in US & Canadian oil production fundamentals have changed dramatically. While the US still import significant quantities of crude we now have more crude in the midwest and OK than we need. Hence WTI prices now trade at a (sometimes significant) discount to GC prices, and the historical relationships to brent no longer apply. WTI became a land locked crude whose fundamentals were no longer tightly correlated to international fundamentals and prices. More recently the US has reversed some of the pipelines that used to transport crude from the GC to OK and the price relationship has converged again.


indiantrader View Post
@SMCJB
Do you trade WTI on CME or ICE when spreading with brent? Do you get cross exchange margin credit when trading on CME and ICE?

You definitely DO NOT get cross exchange margin credit with CME and ICE.

You can trade Brent-WTI on one exchange though and get significant exchange margin credit,. CME has a copy-cat Brent contract and ICE have a WTI contract. Liquidity on ICE's WTI contract is a lot higher than CMEs Brent contract though.

Also maybe more importantly. ICE list a Brent-WTI exchange spread, where you can trade the spread without any leg risk. If you trade the spread in this way you get futures in the underlying contract and not on the spread itself. Details of ICE's Brent-WTI spread can be found here

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  #27 (permalink)
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perhaps this helps
https://www.theice.com/publicdocs/futures/ICE_Monthly_Oil_Report.pdf

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  #28 (permalink)
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indiantrader View Post
Sure the 2,3 and 5 years notes are more affected by the taper decision. The only advantage of 10-30 spread is higher trading range and higher liquidity.
Since the yields on short -term treasuries are expected to decrease, the yield curve is expected to lower on the short end which will raise the curve as a whole. All these are just presumptions and actual trades will be taken only on confirmation on price action and a technical model.

@indiantrader .. From Jan 1 to May 1 2013, the yield curve from short to long term was basically unchanged. Yet, from May 1 to today, has changed dramatically. The 5s have really exploded, but the 2s and shorter have been held in check. So this has been a steeper curve -- yet, over the same period the long end, as measured by 10s and 30s, has actually flattened. My point is that the curve "as a whole" (as you said) is not uniform and that a rise in the 10 year, which is expected, does not imply a proportional rise (and greater, you hope, if you are in a 10/30 steepener) in the 30 year. So the long end may flatten, as it has the latter half of 2013, while at the same time the shorter end has steepened. Again, in other words, the liquidity of the instrument has no bearing on a decision of whether to trade a 10/30 vs a 2/10 or 5/30, as the flattening/steepening of the curve is not uniform across term structure.

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  #29 (permalink)
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@josh

Thanks for detailed reply.

My whole point was related to the taper decision in december and its likely effect on yields and treasury prices and not for last 6 months.

Which contracts are affected by the taper/rate decision? Let me quote from Peter Navarro, prof of economics-- " The short term treasuries are affected by the discretionary rate decisions by fed and long term treasuries are affected by the inflationary expectations".

Lets compare the yield curve on 1 st dec 2013 and 1 st jan 2014 to see 18 th dec taper decision. One can see the pronounced effect on 5 and 10 yr notes, however 30 yr bond yield is little affected. The yields on 5 and 10 year notes are lower almost equally and those on 30 year bonds are lower very minimally. Since price is inversely proportional to yields, my idea was about going long on NOB spread.

The higher liquidity and higher trading range I mentioned was about the exchange-traded spreads and not outrights and in this aspect I see NOB more favourable.

Here are the yield curves for last 1 mth and last 6 mths for comparison.


Something about curve shapes from Navarro.
The curve has steepened in last 6 months which is indicative of good economic recovery.
If the long and short ends move down leaving a hump in middle, then that could be beginning of a regression.
A flat/inverted curve means economic regression

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looking for spread traders-yield-curves.jpg   looking for spread traders-yield-curve_after-taper.jpg  
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  #30 (permalink)
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indiantrader View Post
Lets compare the yield curve on 1 st dec 2013 and 1 st jan 2014 to see 18 th dec taper decision. One can see the pronounced effect on 5 and 10 yr notes, however 30 yr bond yield is little affected. The yields on 5 and 10 year notes are lower almost equally and those on 30 year bonds are lower very minimally. Since price is inversely proportional to yields, my idea was about going long on NOB spread.

Yields on 5s, 10s, and 30s are higher from Dec 1 to Dec 31, not lower. From your own chart, you can see that 5 year yields increased from 1.37 to 1.74 (37 bps), 10 years went from 2.75 to 3.00 (25 bps), whereas the 30 year rose from 3.82 to 3.94 (only 12 bps). Thus the 5-30 and 10-30 curves have both flattened.

If you buy the NOB spread, as you say, and calculate the ratios correctly, you are betting on a steepening of the 10-30 curve, which has flattened in December (and for the entire 2013 year). Most are expecting continued rising yield on the 10 year, most are thinking between 3.25 and 3.60 or so for 2014. And since rate hikes will probably not occur until late 2014 (maybe August-Sept earliest?), it is likely that the 2-10 curve will probably steepen. But why are you expecting 30 year yields to rise so drastically? We are in a relatively low inflation environment, nowhere near 2% target, so why would 30 year yields rise so much? Maybe it will, I just don't see it. Maybe it will flatten, maybe it will steepen. But regardless of that, my point is that you are talking about a Fed-based play, yet the NOB is not really an appropriate spread for that, at least as far as I can figure--you have not explained why it is anyway--you keep talking about short term rates, but the NOB spread does not involve short term rates.


Last edited by josh; January 1st, 2014 at 05:38 PM.
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